A central issue in discussions about the world’s financial system is the nature of the relationship between the International Monetary Fund (IMF) and private international capital markets. On the one hand they may be viewed as substitutes, with the IMF becoming involved in countries that have little access to private capital, or where private capital outflows have created a short-term external financing vacuum. Those who subscribe to the idea of creditor moral hazard go further and claim that the prospect of future IMF lending in the event of a crisis encourages private lenders to underestimate risk and to over-lend, which in turn ultimately generates the crisis and IMF intervention. Viewed as complements, on the other hand, IMF lending is claimed to have a catalytic effect on private capital market lending. In this case, the IMF is presented as bailing in private capital through signaling, coordination, or coercion. Through catalysis the IMF can facilitate balance of payments adjustment with fewer of its own resources. The nature and size of the catalytic effect is therefore of considerable importance. If catalysis is overestimated it will lead to insufficient financing and excessive balance of payments adjustment.
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